420 section 8 The Open Economy: International Trade and Finance
- The financial account was previously known as the
a. gross national product.
b. capital account.
c. trade deficit.
d. investment account.
e. trade balance. - The trade balance includes which of the following?
I. imports and exports of goods
II. imports and exports of services
III. net capital flows
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
5. Which of the following will increase the demand for loanable
funds in a country?
a. economic growth
b. decreased investment opportunities
c. a recession
d. decreased private savings rates
e. government budget surpluses
Tackle the Test: Free-Response Questions
- a. How would a decrease in real income in the United States
affect the U.S. current account balance? Explain.
b. Suppose China decides that it needs a huge program of
infrastructure spending, which it will finance by borrowing.
How will this program affect the U.S. balance of payments?
Explain.
Answer (4 points)
1 point:The current account balance will increase (or move toward a surplus).
1 point:The decrease in income will cause imports to decrease.
1 point:The increase in infrastructure spending in China will reduce the surplus
in the U.S. financial account and reduce the deficit in the U.S. current account.
1 point:Because China is financing the program by borrowing, it is likely
that other countries will increase their lending to China, decreasing their
lending to the United States. These capital outflows from the United States will
reduce the U.S. surplus in the financial account and reduce the deficit in the
current account.
- Use two correctly labeled side-by-side graphs of the loanable
funds market in the United States and China to show how a
higher interest rate in the United States will lead to capital
flows between the two countries. On your graphs, be sure to
label the starting and ending interest rates and the size of the
capital inflows and outflows.